CITICB reported -8.6% YoY net profit growth in 3Q20, vs -26.5% YoY in 2Q20. 9M20 earnings amounted to RMB36.9bn, down 9.4% YoY and accounting for 85.6% of our full-year estimate. Healthy credit growth and NIM expansion were overshadowed by asset quality deterioration, as NPL ratio surged 15bp QoQ and provision coverage weakened. However, we believe the Bank’s lackluster fundamentals have been mostly priced in, and current near-trough valuation offers attractive risk-reward.
- Results positives: 1) Loan growth accelerated to 3.5% in 3Q20 (vs 1.4% in 2Q20), with stronger retail loan growth of 8.6% QoQ. Credit card and consumption loan were likely key drivers. 2) NIM widened 4bp QoQ on rising proportion of higher-yield retail loans. Funding cost should be contained given the unwinding of structured deposits. 3) 3Q20 cost-to-income ratio declined 0.9ppt YoY, as operating expenses retreated 7.3% YoY.
- Results negatives: 1) Asset quality worsened. NPL ratio rose 15bp QoQ to 1.98%, and provision coverage slid 5.6ppt QoQ to 170.1%. NPL formation stayed elevated at 1.81%, by our estimate. 2) Deposit growth was soft at 1.1% in 3Q20 (vs 3.9% in 2Q20), thus lifting LDR to 96.2%. 3) Non-interest income declined 21.5% YoY. Net fee income dropped 8.6% YoY, and trading and investment gain shrank 57.6% YoY amid rising bond yields in 3Q20. 4) CET1/ tier1 CAR fell 17bp/ 21bp QoQ to 8.63%/ 10.09%, yet total CAR climbed 53bp QoQ helped by tier2 capital bond issuance in Aug. Existing RMB40bn CB could boost CET1 CAR by 75bp, but conversion may take time with current distressed valuation.
- Maintain BUY and HK$4.60 TP. We keep earnings forecast unchanged. Our TP of HK$4.60 is derived from 0.43x target P/B and FY20E BVPS of RMB9.6.
